CH 3 Scanning The Marketing Environment

Environmental Scanning

Changes in the marketing environment are a source of opportunities and threats to be managed. The process of continually acquiring information on events occurring outside the organization to identify and interpret potential trends is called environmental scanning.

The social forces of the environment include the demographic characteristics of the population and its values. Changes in these forces can have a dramatic impact on marketing strategy.

Demographics

Describing a population according to selected characteristics such as age, gender, ethnicity, income, and occupation is referred to as demographics.

World Population

Population Explosion
-The most recent estimates indicate there are 6.9 billion people in the world today, and the population is likely to grow to 9.4 billion by 2050. While this growth has led to the term population explosion, the increases have not occurred worldwide; they are primarily in the developing countries of Africa, Asia, and Latin America.

-India is predicted to have the world’s largest population in 2050 with 1.75 billion people, and China will be a close second with 1.44 billion people. World population projections show that the proportion of the world’s population in more developed countries such as the United States, Japan, Australia, and those in Europe is declining

Another important global trend is the shifting age structure of the world population.
– Worldwide, the number of people 60 years and older is expected to more than triple in the coming decades and reach 2 billion by 2050

US Population

Generally, the population is becoming larger, older, and more diverse. The 2010 Census reported that the resident population of the United States was 308 million people.

If current trends in life expectancy, birthrates, and immigration continue, by 2030 the U.S. population will exceed 373 million people. This growth suggests that niche markets based on age, life stage, family structure, geographic location, and ethnicity will become increasingly important. The global trend toward an older population is particularly true in the United States.

Today, there are approximately 40 million people age 65 and older. By 2030, this age group will include more than 72 million people, or almost 20 percent of the population. You may have noticed companies trying to attract older consumers by enlarging typefaces and avoiding colors that are difficult to read (yellow and blue). Finally, the term minority as it is currently used is likely to become obsolete as the size of most ethnic groups will double during the next two decades.

Generational Cohorts

A major reason for the graying of America is that the 76 million baby boomers—the generation of children born between 1946 and 1964—are growing older.

Baby Boomers

Baby boomers are retiring at a rate of 10,000 every 24 hours, and they will all be 65 or older by 2030. Their participation in the workforce has made them the wealthiest generation in U.S. history, accounting for an estimated 50 percent of all consumer spending.

Generation X

Generation X, which includes the 15 percent of the population born between 1965 and 1976. This period is also known as the baby bust, because the number of children born each year was declining.

This is a generation of consumers who are self-reliant, supportive of racial and ethnic diversity, and better educated than any previous generation. They are not prone to extravagance and are likely to pursue lifestyles that are a blend of caution, pragmatism, and traditionalism.

In addition, they are collaborative decision makers. In terms of net worth, Generation X is the first generation to have less than the previous generation.

As baby boomers move toward retirement, however, Generation X is becoming a dominant force in many markets.

Generation X, for example, is replacing baby boomers as the largest segment of business travelers. In response, hotel companies are creating new concepts that appeal to the younger market.

The generational cohort labeled Generation Y includes the 72 million Americans born between 1977 and 1994.

This was a period of increasing births, which resulted from baby boomers having children, and it is often referred to as the echo-boom or baby boomlet.

Generation Y exerts influence on music, sports, computers, video games, and all forms of communication and networking. Generation Y members are interested in distinctive, memorable, and personal experiences and are very adept at managing their lives to create a work-life balance.

They are strong-willed, passionate about the environment, and optimistic. This is also a group that is attracted to purposeful work where they have control. The Making Responsible Decisions box describes how millennials’ interest in sustainability is influencing colleges, graduate schools, and employers. The term millennials is used, with inconsistent definitions, to refer to younger members of Generation Y and sometimes to Americans born since 1994.

The American Household

As the population age profile has changed, so has the structure of the American household. In 1960, 75 percent of all households consisted of married couples.

Today, that type of household is just 50 percent of the population. Only 21 percent of households are married couples with children, and only 10 percent are households with working fathers and stay-at-home moms.

Some of the fastest growing types of households are those with an adult child who has moved back home with his or her parents and those with unmarried partners.

These two categories included 5.5 million individuals and 7.5 million couples, respectively, in 2010.

Analysis by the U.S. Bureau of the Census indicates that young people are postponing marriage and parenthood and that the increase in households with unmarried partners reflects that “pooling resources by moving in together may be one method of coping with extended unemployment.”

Businesses are adjusting to the changes because they have implications for purchases related to weddings, homes, baby and child products, and many other industries.

The increase in cohabitation (households with unmarried partners) may be one reason the national divorce rate has declined during recent years. Even so, the likelihood that a couple will divorce exceeds 40 percent, and divorce among baby boomers—what is being called gray divorce—appears to be increasing.

Blended Family

Formed by merging two previously separated units into a single household. Today, one of every three Americans is a stepparent, stepchild, stepsibling, or some other member of a blended family.

Population Shifts

Nearly a century ago each of the top 10 most populous cities in the United States was within 500 miles of the Canadian border. Today, seven of the top 10 are in states that border Mexico. Last year, Texas gained more people than any other state—its population increased by almost 500,000!

Millennials

Millennials are determined to make a difference in the world and, by doing so, make the world a better place. They are idealistic and eager to get started, particularly when it comes to environmental sustainability, which millennials believe is part of what it means to be socially responsible. The group includes students in college and graduate school and many early career employees. In different ways each group is making its voice heard.

Statistical Areas

To assist marketers in gathering data on the population, the Census Bureau has developed a classification system to describe the varying locations of the population. The system consists of two types of statistical areas:
-A metropolitan statistical area has at least one urbanized area of 50,000 or more people and adjacent territory that has a high degree of social and economic integration.

-A micropolitan statistical area has at least one urban cluster of at least 10,000 but less than 50,000 people and adjacent territory that has a high degree of social and economic integration.

If a metropolitan statistical area contains a population of 2.5 million or more, it may be subdivided into smaller areas called metropolitan divisions. In addition, adjacent metropolitan statistical areas and micropolitan statistical areas may be grouped into combined statistical areas.15
There are currently 366 metropolitan statistical areas, which include 84 percent of the population, and 576 micropolitan statistical areas, which include 10 percent of the population.

Racial & Ethnic Diversity

A notable trend is the changing racial and ethnic composition of the U.S. population. Approximately one in three U.S. residents belongs to the following racial or ethnic groups: African American, Native American or Alaska Native, Asian American, or Native Hawaiian or Pacific Islander.

Multicultural Marketing

To adapt to this new marketplace, many companies are developing multicultural marketing programs, which are combinations of the marketing mix that reflect the unique attitudes, ancestry, communication preferences, and lifestyles of different races.

Because businesses must now market their products to a consumer base with many racial and ethnic identities, in-depth marketing research that allows an accurate understanding of each culture is essential.

Culture

A second social force, culture, incorporates the set of values, ideas, and attitudes that are learned and shared among the members of a group. Because many of the elements of culture influence consumer buying patterns, monitoring national and global cultural trends is important for marketing. Cross-cultural analysis needed for global marketing

Men & Women Roles

One of the most notable cultural changes in the United States in the past 30 years has been in the attitudes and roles of men and women in the marketplace. Some experts predict that as this trend continues, the buying patterns of men and women will eventually be very similar.

Generation Y represents the first generation of women who have no collective memory of the dramatic changes we have undergone.

Changing Values

Culture also includes values that may differ over time and between countries. During the 1970s, a list of values in the United States included achievement, work, efficiency, and material comfort. Today, commonly held values include personal control, continuous change, equality, individualism, self-help, competition, future orientation, and action.

An increasingly important value for consumers in the United States and around the globe is sustainability and preservation of the environment. Concern for the environment is one reason consumers are buying hybrid gas-electric automobiles, such as the Toyota Prius and the Chevy Volt, and electric vehicles, such as the Nissan Leaf.

A change in consumption orientation is also apparent. In the past, consumers often used debt to make many of their purchases. High unemployment and lower real estate prices, however, have changed their perspective. Today, U.S. consumers have become cautious buyers

Value Consciousness

The concern for obtaining the best quality, features, and performance of a product or service for a given price—is driving consumption behavior for many products at all price levels.

Economy

The second component of the environmental scan, the economy, pertains to the income, expenditures, and resources that affect the cost of running a business and household. We’ll consider two aspects of these economic forces: a macroeconomic view of the marketplace and a microeconomic perspective of consumer income.

Macroeconomic Conditions

Of particular concern at the macroeconomic level is the performance of the economy based on indicators such as GDP (gross domestic product), unemployment, and price changes (inflation or deflation).

In an inflationary economy, the cost to produce and buy products and services escalates as prices increase.

From a marketing standpoint, if prices rise faster than consumer incomes, the number of items consumers can buy decreases.

Periods of declining economic activity are referred to as recessions. During recessions, businesses decrease production, unemployment rises, and many consumers have less money to spend. The U.S. economy experienced recessions from 1973-75, 1981-82, 1990-91, and in 2001. Most recently, a recessionary period began in 2007 and ended in 2009, becoming the longest in recent history

Consumer Spending

Consumer spending, which accounts for two-thirds of U.S. economic activity, is affected by expectations of the future.

The two most popular surveys of consumer expectations are the Consumer Confidence Index, conducted by a nonprofit business research organization called the Conference Board & the Index of Consumer Sentiment, conducted by the Survey Research Center at the University of Michigan.

The surveys track the responses of consumers to specific questions about their expectations, and the results are reported once each month.

Consumer Income

The microeconomic trends in terms of consumer income are also important issues for marketers. Having a product that meets the needs of consumers may be of little value if they are unable to purchase it. A consumer’s ability to buy is related to income, which consists of gross, disposable, and discretionary components.

Gross Income

The total amount of money made in one year by a person, household, or family unit is referred to as gross income (or “money income” at the Census Bureau).

Disposable Income

The second income component, disposable income, is the money a consumer has left after paying taxes to use for necessities such as food, housing, clothing, and transportation.

Thus, if taxes rise or fall faster than income, consumers are likely to have more or less disposable income.

Discretionary Income

The third component of income is discretionary income, the money that remains after paying for taxes and necessities. Discretionary income is used for luxury items such as a Cunard cruise. An obvious problem in defining discretionary versus disposable income is determining what is a luxury and what is a necessity.

Technology

Our society is in a period of dramatic technological change. Technology, the third environmental force, refers to inventions or innovations from applied science or engineering research. Each new wave of technological innovation can replace existing products and companies.

Technology of Tomorrow

-Social networks will become social platforms that provide functionality, community, and identity well beyond the value provided by traditional corporate websites.

-“Natural user interfaces” will utilize gesture, touch, and voice to change the way we interact with and control computers and complicated machines.

-Green technologies such as SmartGrid infrastructure, online energy management, and consumer-generated energy (e.g., home wind turbines) will gain widespread acceptance among American consumers.

-Biotechnology will be used to develop genetically modified crops to create enough food for a growing world population.

Technology’s Impact on Consumer Value

-First, the cost of technology is plummeting, causing the customer value assessment of technology-based products to focus on other dimensions such as quality, service, and relationships.

-Technology also provides value through the development of new products.

-Technology can also change existing products and the ways they are produced. Many companies are using technological developments to recycle products through the manufacturing cycle several times.

Marketspace

The transformative power of technology may be best illustrated by the rapid growth of the marketspace, an information- and communication-based electronic exchange environment mostly occupied by sophisticated computer and telecommunication technologies and digitized offerings.

Electronic Commerce

Any activity that uses some form of electronic communication in the inventory, exchange, advertisement, distribution, and payment of goods and services is often called electronic commerce. Network technologies are now used for everything from filing expense reports, to monitoring daily sales, to sharing information with employees, to communicating instantly with suppliers.

Intranet

An intranet, for example, is an Internet-based network used within the boundaries of an organization. It is a private network that may or may not be connected to the public Internet.

Extranet

Extranets, which use Internet-based technologies, permit communication between a company and its supplier, distributors, and other partners (such as advertising agencies).

Competition

The fourth component of the environmental scan, competition, refers to the alternative firms that could provide a product to satisfy a specific market’s needs. There are various forms of competition, and each company must consider its present and potential competitors in designing its marketing strategy.

Pure Competition

At one end of the continuum is pure competition, in which there are many sellers and they each have a similar product. Companies that deal in commodities common to agribusiness (for example, wheat, rice, and grain) often are in a pure competition position in which distribution (in the sense of shipping products) is important but other elements of marketing have little impact.

Monopolistic Competition

In the second point on the continuum, monopolistic competition, many sellers compete with substitutable products within a price range. For example, if the price of coffee rises too much, consumers may switch to tea. Coupons or sales are frequently used marketing tactics.

Oligopoly

Oligopoly, a common industry structure, occurs when a few companies control the majority of industry sales. The wireless telephone industry, for example, is dominated by AT&T, Verizon, and Sprint-Nextel, which have 123, 92, and 48 million subscribers, respectively.

Pure Monopoly

The final point on the continuum, pure monopoly, occurs when only one firm sells the product. Monopolies are common for producers of goods considered essential to a community: water, electricity, and cable service. Typically, marketing plays a small role in a monopolistic setting because it is regulated by the state or federal government. Government control usually seeks to ensure price protection for the buyer, although deregulation in recent years has encouraged price competition in the electricity market.

Components of Competition

In developing a marketing program, companies must consider the factors that drive competition: entry, the bargaining power of buyers and suppliers, existing rivalries, and substitution possibilities.

Scanning the environment requires a look at all of them. These factors relate to a firm’s marketing mix decisions and may be used to create a barrier to entry, increase brand awareness, or intensify a fight for market share.

Barriers to Entry

In considering the competition, a firm must assess the likelihood of new entrants. Additional producers increase industry capacity and tend to lower prices.

A company scanning its environment must consider the possible barriers to entry for other firms, which are business practices or conditions that make it difficult for new firms to enter the market.

Barriers to entry can be in the form of capital requirements, advertising expenditures, product identity, distribution access, or the cost to customers of switching suppliers.

Power of Buyers & Suppliers

A competitive analysis must consider the power of buyers and suppliers.

Powerful buyers exist when they are few in number, there are low switching costs, or the product represents a significant share of the buyer’s total costs.

This last factor leads the buyer to exert significant pressure for price competition. A supplier gains power when the product is critical to the buyer and when it has built up the switching costs.

Existing Competitors & Substitutes

Competitive pressures among existing firms depend on the rate of industry growth. In slow-growth settings, competition is more heated for any possible gains in market share.

High fixed costs also create competitive pressures for firms to fill production capacity. For example, airlines offer discounts for making early reservations and charge penalties for changes or cancellations in an effort to fill seats, which represent a high fixed cost.

Small Businesses As Competitors

While large companies provide familiar examples of the forms and components of competition, small businesses make up the majority of the competitive landscape for most businesses. Consider that there are approximately.

5 million small businesses in the United States, which employ half of all private sector employees. In addition, small businesses generate 65 percent of all new jobs annually and 50 percent of the gross domestic product (GDP).

Research has shown a strong correlation between national economic growth and the level of new small business activity in previous years.

Regulation

For any organization, the marketing and broader business decisions are constrained, directed, and influenced by regulatory forces.

Regulation consists of restrictions state and federal laws place on business with regard to the conduct of its activities.

Regulation exists to protect companies as well as consumers. Much of the regulation from the federal and state levels is the result of an active political process and has been passed to ensure competition and fair business practices.

For consumers, the focus of legislation is to protect them from unfair trade practices and ensure their safety.

Sherman Antitrust Act (1890)

Lobbying by farmers in the Midwest against fixed railroad shipping prices led to the passage of this act, which forbids (1) contracts, combinations, or conspiracies in restraint of trade and (2) actual monopolies or attempts to monopolize any part of trade or commerce.

Clayton Act (1914)

This act forbids certain actions that are likely to lessen competition, although no actual harm has yet occurred.

Robinson-Patman Act (1936)

Small businesses were threatened, and they lobbied for the Act. This act makes it unlawful to discriminate in prices charged to different purchasers of the same product, where the effect may substantially lessen competition or help to create a monopoly.

Product Related Legislation

Various federal laws in existence specifically address the product component of the marketing mix. Some are aimed at protecting the company, some at protecting the consumer, and at least one at protecting both.

Patent Law

A company can protect its competitive position in new and novel products under the patent law, which gives inventors the right to exclude others from making, using, or selling products that infringe the patented invention.

Copyright

The federal copyright law is another way for a company to protect its competitive position in a product.

The copyright law gives the author of a literary, dramatic, musical, or artistic work the exclusive right to print, perform, or otherwise copy that work.

Copyright is secured automatically when the work is created. However, the published work should bear an appropriate copyright notice, including the copyright symbol, the first year of publication, and the name of the copyright owner, and it must be registered under the federal copyright law.

Digital Millenium Copyright Act (1998)

Digital technology has necessitated additional copyright legislation, called the Digital Millennium Copyright Act (1998), to improve protection of copyrighted digital products. In addition, producers of DVD movies, music recordings, and software want protection from devices designed to circumvent antipiracy elements of their products.

Consumerism

A grassroots movement started in the 1960s to increase the influence, power, and rights of consumers in dealing with institutions. This movement continues and is reflected in growing consumer demands for ecologically safe products and ethical and socially responsible business practices. One hotly debated issue concerns liability for environmental abuse.

Trademarks

Trademarks are intended to protect both the firm selling a trademarked product and the consumer buying it.

A Senate report states:
The purposes underlying any trademark statute [are] twofold. One is to protect the public so that it may be confident that, in purchasing a product bearing a particular trademark which it favorably knows, it will get the product which it asks for and wants to get. Secondly, where the owner of a trademark has spent energy, time, and money in presenting to the public the product, he is protected in this investment from misappropriation in pirates and cheats.

Lanham Act (1946)

Provides for registration of a company’s trademarks. Historically, the first user of a trademark in commerce had the exclusive right to use that particular word, name, or symbol in its business.

Registration under the Lanham Act provides important advantages to a trademark owner that has used the trademark in interstate or foreign commerce, but it does not confer ownership. A company can lose its trademark if it becomes generic, which means that it has primarily come to be merely a common descriptive word for the product.

Trademark Law Revision Act

In 1988, the Trademark Law Revision Act resulted in a major change to the Lanham Act, allowing a company to secure rights to a name before actual use by declaring an intent to use the name.

In 2003, the United States agreed to participate in the Madrid Protocol, which is a treaty that facilitates the protection of U.S. trademark rights throughout the world.

Price Related Legislation

The pricing component of the marketing mix is the focus of regulation from two perspectives: price fixing and price discounting. Although the Sherman Act did not outlaw price fixing, the courts view this behavior as per se illegal (per se means “through or of itself”), which means the courts see price fixing itself as illegal.

Certain forms of price discounting are allowed. Quantity discounts are acceptable; that is, buyers can be charged different prices for a product provided there are differences in manufacturing or delivery costs. Promotional allowances or services may be given to buyers on an equal basis proportionate to volume purchased. Also, a firm can meet a competitor’s price “in good faith.”

Distributed-Related Legislation

The government has four concerns with regard to distribution—earlier referred to as “place” actions in the marketing mix—and the maintenance of competition.

-The first, exclusive dealing, is an arrangement a manufacturer makes with a reseller to handle only its products and not those of competitors. This practice is illegal under the Clayton Act only when it substantially lessens competition.

-Requirement contracts require a buyer to purchase all or part of its needs for a product from one seller for a time period. These contracts are not always illegal but depend on the court’s interpretation of their impact on distribution.

-Exclusive territorial distributorships are a third distribution issue often under regulatory scrutiny. In this situation, a manufacturer grants a distributor the sole rights to sell a product in a specific geographical area. The courts have found few violations with these arrangements.

-The fourth distribution strategy is a tying arrangement, whereby a seller requires the purchaser of one product to also buy another item in the line. These contracts may be illegal when the seller has such economic power in the tying product that the seller can restrain trade in the tied product.

FTC

Promotion and advertising are aspects of marketing closely monitored by the Federal Trade Commission (FTC), which was established by the FTC Act of 1914.

The FTC has been concerned with deceptive or misleading advertising and unfair business practices and has the power to
(1) issue cease and desist orders and
(2) order corrective advertising. In issuing a cease and desist order, the FTC orders a company to stop practices the commission considers unfair.

With corrective advertising, the FTC can require a company to spend money on advertising to correct previous misleading ads. The enforcement powers of the FTC are so significant that often just an indication of concern from the commission can cause companies to revise their promotion.

A landmark legal battle regarding deceptive advertising involved the Federal Trade Commission and Campbell Soup Co. It had been Campbell’s practice to insert clear glass marbles into the bottom of soup containers used in print advertisements to bring the soup ingredients (e.g., noodles or chicken) to the surface. The FTC ruled that the advertising was deceptive because it misrepresented the amount of solid ingredients in the soup, and it issued a cease and desist order. Campbell and its advertising agency agreed to discontinue the practice

The Deceptive Mail Prevention and Enforcement Act (1999)

“No purchase is necessary to enter” is displayed in the mailing, in the rules, and on the entry form.

Telephone Consumer Protection Act (1991)

Provides requirements for telemarketing promotions, including fax promotions. Telemarketing is also subject to a law that created the National Do Not Call Registry, which is a list of consumer phone numbers of people who do not want to receive unsolicited telemarketing calls.

Self Regulation

The government has provided much legislation to create a competitive business climate and protect the consumer. An alternative to government control is self-regulation, where an industry attempts to police itself.

There are two problems with self-regulation, however: noncompliance by members and enforcement.

In addition, if attempts at self-regulation are too strong, they may violate the Robinson-Patman Act.

The best-known self-regulatory group is the Better Business Bureau (BBB). This agency is a voluntary alliance of companies whose goal is to help maintain fair practices. Although the BBB has no legal power, it does try to use “moral suasion” to get members to comply with its standards. The BBB recently developed a reliability assurance program, called BBB Online, to provide objective consumer protection for Internet shoppers. Before they display the BBB Online logo on their website, participating companies must be members of their local Better Business Bureau, have been in business for at least one year, agree to participate in BBB’s advertising self-regulation program, abide by the BBB Code of Business Practices, and work with the BBB to resolve consumer disputes that arise over goods or services promoted or advertised on their site.